News Corp. Swaps Diverge as S&P Considers Cut: Corporate Finance
Credit-default swaps on News Corp. (NWS) are the highest on record relative to its media peers as Standard & Poor’s says it may cut the publisher’s bond rating because of risks associated with the phone-hacking scandal.
The cost of protecting debt of the owner of the Fox TV networks and the Wall Street Journal from default soared 58 basis points this month to 142 basis points as of yesterday, compared with an increase of 10 basis points for the average contract on Rupert Murdoch’s company and its four biggest competitors. Relative yields on News Corp.’s bonds have risen 31 basis points, while those of similar companies widened one basis point, Bank of America Merrill Lynch index data show.
S&P said in a statement it may lower New York-based News Corp. (NWSA)’s BBB+ corporate credit rating after “broadening legal inquires” into the phone-hacking scandal centering on the defunct News of the World newspaper “increased business and reputation risks” for the media company. The review came just five days after the ratings company said the outlook was stable.
“The court of public opinion can be fairly merciless, and that’s the bigger headwind now,” Tom Farina, managing director at Deutsche Insurance Asset Management in New York, which oversees $200 billion, said in a telephone interview. While News Corp. may not see “direct financial ramifications,” the reputational damage is the larger risk, Farina said.
Most on Record
Credit-default swaps on its News America Inc. unit are the highest on record, compared with the average contract on the debt of competitors. Swaps on News Corp., Walt Disney Co. (DIS), Time Warner Inc., Comcast Corp. (CMCSA), and Viacom Inc. (VIA/B) climbed to 79 basis points from as low as 54 basis points in December, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.
News Corp. has $15.5 billion of long-term borrowings, according to data compiled by Bloomberg.
Contracts protecting debt issued by News America, which pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt, have almost doubled since July 13, adding 64 basis points to reach the highest since April 2009, according to CMA. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
The contracts fell four basis points to 136 basis points as of 11:46 a.m. in New York, after earlier climbing as high as 145, according to broker Phoenix Partners Group.
‘Healthiest Balance Sheets’
“We’ve got one of the healthiest balance sheets in the business,” said Alice Macandrew, a News Corp. spokeswoman in London. “I can’t imagine anyone would be worried” about the company’s ability to service its debt.
Revelations that reporters from the News of the World hacked into dozens of telephone messages left for people including celebrities, members of Prince Charles’s staff and a murdered schoolgirl forced Murdoch, 80, to shut the newspaper and abandon a plan to purchase the 61 percent of British Sky Broadcasting Group Plc it didn’t own.
The scandal has also led to the resignations of News Corp. executives Les Hinton and Rebekah Brooks; she was arrested July 17 in London. Two top police officers also resigned amid investigations of links between the News of the World and Scotland Yard.
News Corp. is considering elevating Chief Operating Officer Chase Carey to chief executive officer, succeeding Murdoch, people with knowledge of the situation said. A decision hasn’t been made and a move depends on Murdoch’s performance before Parliament today, said the people, who weren’t authorized to speak publicly. Murdoch would remain chairman, the people said.
News Corp. Properties
News Corp. also owns Harper Collins Publishers, the Times of London, the Australian and Dow Jones Newswires. Bloomberg LP, the parent of Bloomberg News, competes with News Corp. units in providing financial news and information.
Without the purchase of pay-television provider Isleworth, England-based BSkyB, News Corp. may now use its $11.8 billion of cash to finance an expanded stock-repurchase program and increase its dividend, analysts at bond researcher CreditSights Inc. said in a note yesterday.
Last week, News Corp. almost tripled its stock repurchase program to $5 billion, which indicates the company “intends to enhance shareholder value (or at least reclaim shareholder value that has been lost in recent weeks),” CreditSights analysts Karen Klapper and Mark Chapman wrote in a note July 13.
Operating income at News Corp.’s newspapers and information services unit has fallen by 28 percent in the past five years. Publishing accounts for about 18 percent of total revenue.
The credit swap contracts are approaching levels implying the debt is rated Baa3, the lowest investment grade, according to Moody’s Corp.’s capital markets group. Moody’s Investors Service grades the company’s debt Baa1, Bloomberg data show.
“There’s not anything when it comes to its near-term financial position that could put it at risk,” Robert Eckerstrom, a director in the Moody’s capital markets research group in New York, said in a telephone interview. “That said, all the allegations out there could easily pressure spreads.”
The extra yield investors demand to own News Corp. debt instead of Treasuries has climbed 31 basis points this month to 212 basis points as of yesterday, according to Bank of America Merrill Lynch index data. Relative yields on U.S. media company bonds have climbed in the same period to 155 basis points.
News Corp.’s $1.15 billion of 6.4 percent notes due December 2035 have declined 7.75 cents since July 13 to 99.55 cents on the dollar to yield 6.436 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The average yield for BB rated bonds fell to 6.21 percent yesterday, according to Bank of America Merrill Lynch index data.
‘No Big Deal’
The company’s long-term borrowings are up from $13.2 billion as of June 30, 2010, the end of its previous fiscal year, according to a regulatory filing. Revenue declined to $8.2 billion in the first calendar quarter from $8.8 billion the year before, according the filing.
The scandal hasn’t been enough to make William Hochmuth, an analyst at Thrivent Financial, which had $73 billion in assets under management at yearend, want to sell the News Corp. bonds his firm holds.
“I haven’t heard anything to this point in time that tells me News Corp. is a fundamentally worse credit than it was a week ago,” he said in a telephone interview. “Six months, 12 months from now, you’d like to think this whole thing has blown over and it’s no big deal, but there’s a lot of time and volatility in that period.”
S&P placed the company’s rating on CreditWatch, citing developments that “materially increase the reputational, management, litigation, and other risks currently faced by News Corp. and its subsidiaries.”
“If evidence arises sufficient to bring a criminal charge against the company or any current or former employee of the company, then prosecuting authorities in the U.S. could proceed with those charges,” credit analysts Michael Altberg and Heather Goodchild wrote in the note yesterday. “Any criminal conviction can materially affect the reputation of the company, which may be more substantial than any financial penalties.”
News Corp. Class A nonvoting shares climbed 84 cents, or 5.6 percent, to $15.80 on the Nasdaq Stock Market at 12:10 p.m. New York time. It had declined 17 percent from July 1 through yesterday, before the Guardian reported that News of the World employees had intercepted the voice mail of Milly Dowler, a schoolgirl who was later found murdered.
While the scandal isn’t yet showing signs of affecting the company’s financial soundness, if it were to reconsider buying BskyB in about 12 months, “then there may be an issue where they have to raise some debt,” said Dave Novosel, an analyst with Gimme Credit LLC in Chicago. Additionally, investors may worry about how high the scandal reaches within the ranks of management, Novosel said.
“You do have the qualitative factors regarding management and how they may have to adjust their model,” he said. Investors may be concerned that “you actually might be getting people fired that might not be directly involved but to placate the public and the political people that are in Britain.”
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